As we approach the end of the year, many business owners are considering investments in machinery, vehicles, or other equipment. In some cases, businesses have upgraded to less labor-intensive equipment to address staffing shortages or boost productivity through new technologies. This is a good time to meet with your CPA to discuss tax benefits — such as bonus depreciation — related to these purchases. This can be especially advantageous if your business has had a strong year and has excess cash on hand or an unused capital expenditures budget.
When interest rates were at historic lows, the financing decision carried less weight. Now, interest is a meaningful expense, and the costs and benefits of financing must be weighed against paying cash. It’s important to recognize that paying cash is like earning a risk-free return equal to the interest rate you would have paid. With Prime at 7.00%, paying cash makes a lot of sense if your business has excess liquidity.
However, if cash is tight — or if your cash has a more valuable use, such as funding working capital or replenishing inventory — it may make more sense to finance, even at these higher rates. This is a great conversation to have with your banker, especially if you can project out your cash needs over the next 12 months. This way your banker can help advise on what financing options would serve your business best — or if now is the right time to put some of your cash to work.
Answers provided by Pete Zeiser, President - Chesterfield Commercial at Midwest BankCentre. He can be reached at 314-633-6762 or pzeiser@midwestbankcentre.com.